ANALYZING AND RECORDING
TRANSACTIONS
Chapter 2
© 2009 The McGraw-Hill
Companies, Inc.,
C1 ANALYZING AND RECORDING
PROCESS
Analyze each transaction and Record relevant transactions
event from source documents and events in a journal
Post journal
information
Prepare and analyze to ledger
the trial balance accounts
McGraw-Hill/Irwin Slide 2
C2
SOURCE DOCUMENTS
Bills from
Checks Suppliers Purchase
Orders
Employee
Earnings
Records
Bank
Statements
Sales
Tickets
McGraw-Hill/Irwin Slide 3
C3 THE ACCOUNT AND ITS
ANALYSIS
An
An account
account is is aa
record
record of of
increases The
The general
general
increases and and ledger
decreases
decreases in in aa ledger isis aa record
record
specific containing
containing all
all
specific asset,
asset, accounts
liability,
liability, equity,
equity, accounts usedused byby
revenue, the
the company.
company.
revenue, or or
expense
expense item.
item.
McGraw-Hill/Irwin Slide 4
C3 THE ACCOUNT AND ITS
ANALYSIS
Assets
Assets Liability
Liability Equity
Equity
Asset
Accounts
Accounts
Accounts = Liability
Accounts
Accounts
Accounts + Equity
Accounts
Accounts
Accounts
Owner,
Owner, Capital
Capital
Owner,
Owner, Withdrawals
Withdrawals
McGraw-Hill/Irwin Slide 5
C3
ASSET ACCOUNTS
Cash
Accounts
Land
Receivable
Buildings
Asset
Asset Notes
Receivable
Accounts
Accounts
Prepaid
Equipment
Accounts
Supplies
McGraw-Hill/Irwin Slide 6
C3
LIABILITY ACCOUNTS
Accounts
Accounts Notes
Notes
Payable
Payable Payable
Payable
Liability
Accounts
Accrued
Accrued Unearned
Unearned
Liabilities
Liabilities Revenue
Revenue
McGraw-Hill/Irwin Slide 7
C3
EQUITY ACCOUNTS
Owner’s
Owner’s Owner’s
Owner’s
Equity
Equity Withdrawals
Withdrawals
Equity
Equity
Accounts
Accounts
Owner’s
Owner’s
Revenues
Revenues Expenses
Expenses Capital
Capital
McGraw-Hill/Irwin Slide 8
C3 THE ACCOUNT AND ITS
ANALYSIS
Assets = Liabilities
Liabilities + Equity
Equity
+ – + –
Owner’s
Owner’s Owner's
Owner's Revenues
Revenues Expenses
Expenses
Capital
Capital Withdrawals
Withdrawals
McGraw-Hill/Irwin Slide 9
C4 LEDGER AND CHART OF
ACCOUNTS
The
The ledger
ledger is
is aa collection
collection of
of all
all accounts
accounts for
for an
an
information
information system.
system. A A company’s
company’s sizesize and
and diversity
diversity
of
of operations
operations affect
affect the
the number
number ofof accounts
accounts needed.
needed.
The chart of accounts is a list of all accounts and includes an
identifying number for each account.
Account Number Account Name Accounting Number Accounting Name
101 Cash 302 C. Taylor, Withdrawals
106 Accounts receivable 403 Revenues
126 Supplies 406 Rental revenue
128 Prepaid insurance 622 Salaries expense
167 Equipment 637 Insurance expense
201 Accounting payable 640 Rent expense
236 Unearned revenue 652 Supplies expense
301 C. Taylor, Capital 690 Utilities expense
McGraw-Hill/Irwin Slide 10
C5
DEBITS AND CREDITS
A T-account represents a ledger account and is a
tool used to understand the effects of one or more
transactions.
Account Title
(Left side) (Right side)
Debit Credit
McGraw-Hill/Irwin Slide 11
C5
DOUBLE-ENTRY ACCOUNTING
Assets
Assets = Liabilities
Liabilities + Equity
Equity
ASSETS LIABILITIES EQUITIES
Debit Credit Debit Credit Debit Credit
+ - - + - +
McGraw-Hill/Irwin Slide 12
C5
DOUBLE-ENTRY ACCOUNTING
Equity
Owner’s
Owner’s _ Owner's
Owner's _ Expenses
Capital
Capital Withdrawals
Withdrawals + Revenues
Revenues Expenses
Owner’s Owner's Revenues Expenses
Capital Withdrawals
Debit Credit Debit Credit Debit Credit Debit Credit
- + + - - + + -
McGraw-Hill/Irwin Slide 13
C5
DOUBLE-ENTRY ACCOUNTING
An account balance is the difference between the increases
and decreases in an account.
Notice the T-Account.
McGraw-Hill/Irwin Slide 14
P1 JOURNALIZING &
POSTING TRANSACTIONS
Assets
Assets = Liabilities
Liabilities + Equity
Equity
T- Account
(Left side) (Right side)
Debit Credit
Step 1: Analyze
Step 2: Apply double-
transactions and source
documents. entry accounting
ACCOUNT NAME: ACCOUNT No.
Date Description PR Debit Credit Balance
Step 4: Post entry to ledger Step 3: Record journal entry
McGraw-Hill/Irwin Slide 15
P1 JOURNALIZING
TRANSACTIONS
Transaction
Transaction
Titles
Titles of
of Affected
Affected
Date
Date Accounts
Accounts
Transaction
Transaction
Dollar
Dollar amount
amount of
of debits
debits
explanation
explanation and
and credits
credits
McGraw-Hill/Irwin Slide 16
P1
BALANCE COLUMN ACCOUNT
T-accounts are useful illustrations, but balance
column ledger accounts are used in practice.
McGraw-Hill/Irwin Slide 17
P1
POSTING JOURNAL ENTRIES
1 Identify the debit account in ledger.
McGraw-Hill/Irwin Slide 18
P1
POSTING JOURNAL ENTRIES
2 Enter the date.
McGraw-Hill/Irwin Slide 19
P1
POSTING JOURNAL ENTRIES
3 Enter the amount and description.
McGraw-Hill/Irwin Slide 20
P1
POSTING JOURNAL ENTRIES
4 Enter the journal reference.
McGraw-Hill/Irwin Slide 21
P1
POSTING JOURNAL ENTRIES
5 Compute the balance.
McGraw-Hill/Irwin Slide 22
P1
POSTING JOURNAL ENTRIES
6 Enter the ledger reference.
McGraw-Hill/Irwin Slide 23
A1
ANALYZING TRANSACTIONS
Analysis:
Double entry:
(1) Cash 101 30,000
C. Taylor, Capital 301 30,000
Posting:
Cash 101 C. Taylor, Capital 301 301
(1) 30,000 (1) 30,000
McGraw-Hill/Irwin Slide 24
A1
ANALYZING TRANSACTIONS
Analysis:
Double entry:
(2) Supplies 126 2,500
Cash 101 2,500
Posting:
Supplies 126 Cash 101
(2) 2,500 (1) 30,000 (2) 2,500
McGraw-Hill/Irwin Slide 25
A1
ANALYZING TRANSACTIONS
Analysis:
Double entry:
(3) Equipment 167 26,000
Cash 101 26,000
Posting:
Equipment 167 Cash 101
(3) 26,000 (1) 30,000 (2) 2,500
(3) 26,000
McGraw-Hill/Irwin Slide 26
A1
ANALYZING TRANSACTIONS
Analysis:
Double entry:
(4) Supplies 126 7,100
Accounts payable 201 7,100
Posting:
Supplies 126 Accounts Payable 201
(2) 2,500 (4) 7,100
(4) 7,100
McGraw-Hill/Irwin Slide 27
A1
ANALYZING TRANSACTIONS
Analysis:
Double entry:
(5) Cash 101 4,200
Consulting Revenue 403 4,200
Posting:
Cash 403 Consulting Revenue 101
(1) 30,000 (2) 2,500 (5) 4,200
(5) 4,200 (3) 26,000
McGraw-Hill/Irwin Slide 28
After processing its remaining transactions for
P2
December, FastForward’s Trial Balance is prepared.
FastForward
Trial Balance The trial balance
December 31, 2009
lists all account
Debits Credits
Cash $ 4,350
balances in the
Accounts receivable - general ledger. If
Supplies 9,720
Prepaid Insurance 2,400
the books are in
Equipment 26,000 balance, the total
Accounts payable $ 6,200
Unearned consulting revenue 3,000
debits will equal the
C. Taylor, Capital 30,000 total credits.
Owner's Withdrawals 200
Consulting revenue 5,800
Rental revenue 300
Salaries expense 1,400
Rent expense 1,000
Utilities expense 230
Total $ 45,300 $ 45,300
McGraw-Hill/Irwin Slide 29
P2
PREPARING A TRIAL BALANCE
Preparing a trail balance involves three steps:
[Link] each account title and its amount (from
ledger) in the trial balance. If an account has a
zero balance, list it with a zero in the normal
balance column (or omit it entirely).
[Link] the total of debit balances and the
total of credit balances.
[Link] (prove) total debit balances equal total
credit balances.
McGraw-Hill/Irwin Slide 30
P2 SEARCHING FOR AND
CORRECTING ERRORS
If the trial balance does not balance, the
error(s) must be found and corrected.
Make sure the trial Re-compute each
balance columns are account balance in the
correctly added. ledger.
Make sure account Verify that each journal
balances are correctly entry is posted correctly.
entered from the ledger.
See if debit or credit Verify that each original
accounts are mistakenly journal entry has equal
placed on the trial balance. debits and credits.
McGraw-Hill/Irwin Slide 31
P3 USING A TRIAL BALANCE TO PREPARE
FINANCIAL STATEMENTS
Point in Point in
Time Period of Time Time
Statement of Cash Flows
Statement of Owner’s Equity
Income Statement
Beginning Ending
Balance Balance
Sheet Sheet
McGraw-Hill/Irwin Slide 32
P3
INCOME STATEMENT
FASTFORWARD
Income Statement
For the Month Ended December 31, 2009
Revenues:
Consulting revenue $ 5,800
Rental revenue 300
Total revenues $ 6,100
Expenses:
Rent expense 1,000
Salaries expense 1,400
Utilities expense 230
Total expenses 2,630
Net income $ 3,470
McGraw-Hill/Irwin Slide 33
P3
STATEMENT OF OWNER'S EQUITY
FASTFORWARD
Statement of Owner's Equity
For the Month Ended December 31, 2009
C. Taylor, Capital 12/1/09 $ -
Net income for December 3,470
Connections Plus: Investments by Owner 30,000
33,470
Less: Owner Withdrawals 200
. C. Taylor, Capital, 12/31/09 $ 33,270
FASTFORWARD
Income Statement
For the Month Ended December 31, 2009
Revenues:
Consulting revenue $ 5,800
Rental revenue 300
Total revenues $ 6,100
Expenses:
Rent expense 1,000
Salaries expense 1,400
Utilities expense 230
Total expenses 2,630
Net income $ 3,470
McGraw-Hill/Irwin Slide 34
P3
BALANCE SHEET
Statement of Owner's Equity
For the Month Ended December 31, 2009 FASTFORWARD
C. Taylor, Capital 12/1/09 $ - Balance Sheet
Net income for December 3,470 December 31, 2009
Plus: Investments by Owner 30,000
Assets
33,470
Less: Owner Withdrawals 200 Cash $ 4,350
C. Taylor, Capital, 12/31/09 $ 33,270 Supplies 9,720
Prepaid insurance 2,400
Equipment 26,000
Total assets $ 42,470
Liabilities
Accounts payable $ 6,200
Unearned revenue 3,000
Connections Total liabilities
Equity
9,200
C. Taylor, Capital $ 33,270
Total equity 33,270
Total liabilities and equity $ 42,470
McGraw-Hill/Irwin Slide 35
P3
PRESENTATION ISSUES
1. Dollar signs are not used in journals and ledgers.
2. Dollar signs appear in financial statements and other
reports such as trial balances. The usual practice is to
put dollar signs beside only the first and last numbers
in a column.
3. When amount are entered in the journal, ledger, or trial
balance, commas are optional to indicate thousands,
millions, and so forth.
4. Commas are always used in financial statements.
5. Companies commonly round amounts in reports to the
nearest dollar, or even to a higher level.
McGraw-Hill/Irwin Slide 36
A2
Debt to Assets Ratio
Total Debt
Total Assets
Evaluates the level of debt risk.
A higher ratio indicates that there is
a greater probability that a company
will not be able to pay it’s debt in the
future.
McGraw-Hill/Irwin Slide 37
END OF CHAPTER 2
McGraw-Hill/Irwin Slide 38